Question

The financial statements for Royale and Cavalier companies are summarized here:

	Royale Company				Cavalier Company
Balance Sheet
Cash	$	17,000			$	80,000
Accounts Receivable, Net		47,000				8,000
Inventory		94,000				9,000
Equipment, Net		534,000				144,000
Other Assets		132,000				38,000
Total Assets	$	824,000			$	279,000
Current Liabilities	$	104,000			$	21,000
Note Payable (long-term)		174,000				39,000
Common Stock (par $20)		472,000				202,000
Additional Paid-In Capital		42,000				9,000
Retained Earnings		32,000				8,000
Total Liabilities and Stockholders’ Equity	$	824,000			$	279,000
Income Statement
Sales Revenue	$	776,000			$	256,000
Cost of Goods Sold		472,000				142,000
Other Expenses		232,000				87,000
Net Income	$	72,000			$	27,000
Other Data
Per share price at end of year	$	18.00			$	10.00
Selected Data from Previous Year
Accounts Receivable, Net	$	39,000			$	6,000
Note Payable (long-term)		174,000				39,000
Equipment, Net		534,000				144,000
Inventory		87,000				30,000
Total Stockholders' Equity		546,000				219,000

These two companies are in the same business and state but different cities. Each company has been in operation for about 10 years. Both companies received an unqualified audit opinion on the financial statements. Royale Company wants to borrow $67,000 cash and Cavalier Company is asking for $22,000. The loans will be for a two-year period. Both companies estimate bad debts based on an aging analysis, but Cavalier has estimated slightly higher uncollectible rates than Royale. Neither company issued stock in the current year. Assume the end-of-year total assets and net equipment balances approximate the year’s average and all sales are on account.

Required:

1. Calculate the following ratios. (Use 365 days in a year. Round your intermediate calculations and final answers to 2 decimal places.)

The financial statements for Royale and Cavalier companies are summarized here:

	Royale Company				Cavalier Company
Balance Sheet
Cash	$	17,000			$	80,000
Accounts Receivable, Net		47,000				8,000
Inventory		94,000				9,000
Equipment, Net		534,000				144,000
Other Assets		132,000				38,000
Total Assets	$	824,000			$	279,000
Current Liabilities	$	104,000			$	21,000
Note Payable (long-term)		174,000				39,000
Common Stock (par $20)		472,000				202,000
Additional Paid-In Capital		42,000				9,000
Retained Earnings		32,000				8,000
Total Liabilities and Stockholders’ Equity	$	824,000			$	279,000
Income Statement
Sales Revenue	$	776,000			$	256,000
Cost of Goods Sold		472,000				142,000
Other Expenses		232,000				87,000
Net Income	$	72,000			$	27,000
Other Data
Per share price at end of year	$	18.00			$	10.00
Selected Data from Previous Year
Accounts Receivable, Net	$	39,000			$	6,000
Note Payable (long-term)		174,000				39,000
Equipment, Net		534,000				144,000
Inventory		87,000				30,000
Total Stockholders' Equity		546,000				219,000

These two companies are in the same business and state but different cities. Each company has been in operation for about 10 years. Both companies received an unqualified audit opinion on the financial statements. Royale Company wants to borrow $67,000 cash and Cavalier Company is asking for $22,000. The loans will be for a two-year period. Both companies estimate bad debts based on an aging analysis, but Cavalier has estimated slightly higher uncollectible rates than Royale. Neither company issued stock in the current year. Assume the end-of-year total assets and net equipment balances approximate the year’s average and all sales are on account.

Required:

1. Calculate the following ratios. (Use 365 days in a year. Round your intermediate calculations and final answers to 2 decimal places.)

Tests of Profitability:

Royale Company Cavalier Company

1. Net Profit Margin:

2. Gross Profit Margin

3. Fixed Asset Turnover

4. Return on Equity

5. Earnings per Share

6. Price/Earnings Ratio

Tests of Liquidity:

7. Receivables Turnover

Days to Collect

8. Inventory Turnover

Days to Sell

9. Current Ratio:

Tests to Solvency:

10. Debt-to-Assets:

Answer 1

Particular	Formula	Answer Unit	Royal Company	Ratio	Cavalier Company	Ratio
Net Profit Margin	Net Income / Sales	in Percentage	72,000/7,76,000	0.0928	27,000/2,56,000	0.1055
				9.28%		10.55%
Gross Profit Margin	(Sales - COGS)/Sales	in Percentage	(7,76,000-4,72,000)/7,76,000	0.3918	(2,56,000-1,42,000)/2,56,000	0.4453125
				39.18%		44.53%
Fixed Assets Turnover Ratio	Net Sales /                                                       (Fixed Assets - Accumulated Depreciation)	In Times	7,76,000/5,34,000	1.45	2,56,000/1,44,000	1.78
				1.45		1.78
Return on Equity	Net Income/Shareholders Equity	in Percentage	72,000/5,46,000	0.1319	27,000/2,19,000	0.1233
				13.19%		12.33%
Earning Per Share	Net Income/No of Shares	in $	72,000/ (4,72,000/20)	3.05	27,000/(2,02,000/20)	2.67
				3.05		2.67
Price Earning Ratio	Market Price / Earning Per Share	In Times	18/3.05	5.90	10/2.67	3.75
				5.90		3.75
Receivable Turnover Ratio	Net Credit Sale/Average Accounts Receivable	In Times	7,76,000/[(39,000+47,000)/2]	18.05	2,56,000/[(8,000+6,000)/2]	36.57
		In Days	365/18.05	20.23		9.98
Inventory Turnover Ration	COGS/Average Inventory	In Times	4,72,000/[(87,000+94,000)/2]	5.22	1,42,000/[(30,000+9,000)/2]	7.28
		In Days	365/5.22	69.92	365/7.28	50.14
Current Ratio	Current Asset / Current Liablities	In Times	(8,24,000-5,34,000)/1,04,000	2.79	(2,79,000 - 1,44,000)/21,000	6.43
				2.79		6.43
Debt to Asset Ration	Debt / Asset	In Times	1,74,000/8,24,000	0.21	39,000/2,79,000	0.14
				0.21		0.14